I simply used the screener to identify 1-star companies with the highest 52-week gain. The 1-star rating should mean they are bad companies and the 52-week gain should mean they are overpriced. We’ll see how it works!

The company is really trying to figure itself out so it'll likely be a bit slower in movement. Both DTSI and Dolby have had some strong growth over the last year. Not sure either is a great play right now.

I got interested in DTSI as a consumer. After getting a new surround system over a year ago I ended up choosing DTS as the sound option on DVDs over Dolby since it simply provides better surround sound. Then I got interested in the company behind DTS and researched its financials. Its financials look decent, especially in comparison with Dolby, which has higher forward P/E ratio than DTS.

Then I took a field trip to few consumer electronics stores to see how many home cinema and A/V receiver devices carry the DTS logo. I was surprised to see that over 99% of them license DTS. Looking next through the DVD isles, however, I was disappointed that only 30-40% of DVDs carry the DTS logo.

This disappointment turns out to be an opportunity. DTS has the opportunity to increase its penetration of the DVD market and hence increase its license revenues from movie studios. DTS could for example start advertising its superior surround system directly to end consumers to increase its traction in that space. Management’s focus on the consumer electronics market is the right move. Especially keeping in mind the expected growth in the home entertainment space.

DTS Inc. is one of the leading providers of entertainment technology, products and services to the audio and image entertainment markets worldwide. The company with its core competency in high quality digital multi-channel audio, commonly referred to as surround sound, which provides more than two-channels of audio, should be in a better position to provide quality sound solutions for next generation home theater. It generates around 62% of its revenue from consumer segment, while cinema and digital image segments constitutes 31% and 6% respectively.

The consumer segment’s revenue is primarily dependent upon the home theater and DVD player markets, which have experienced rapid growth over the past several years. This is evident from the fact that 38% of the households today own a home theater, when compared to 21% witnessed in 2000. One of the key indicators for future of home theater market is the growth of high definition displays (HD), the next generation DVD formats. According to JupiterResearch, the number of HD-receiving households will reach close to 75 million, or 63% of total households in the US, by the end of 2010.

The trend in the motion picture industry and movie exhibition market toward digital delivery of entertainment content continues to gain momentum. To take advantage of this trend, DTS has signed an exclusive license agreement with Avica Technology Corporation, a provider of products and services for the digital cinema market. The given agreement should complement the DTS cinema product offerings and should accelerate their entry into the digital cinema market.

Further, it is anticipated that home theater systems featuring surround sound will continue to experience solid growth and drive a majority of home audio industry sales. A bright outlook for DVD market should enhance DTS sales and thereby making it a healthy investment proposition.